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June 25, 2010

Property vs shares: battle of the assets


What’s the best investment for you? Property or share

s?

BY MATTHEW LIDDY

Investors need to take their goals, their individual risk profiles and their investment strategy into account when deciding whether to invest in property or shares, investment analysts say.

These individual factors make it very difficult to say outright that one asset class is a better investment than the other, according to property writer Margaret Lomas.

Lomas likens asking whether property or shares is better to asking which is better out of a Mercedes and an overseas trip.

“You can’t compare the two because they’re two totally different propositions. Just because you spend money on each of them doesn’t make them comparable.”

When it comes to wealth creation Metropole Properties director Michael Yardney believes there’s no doubt property is the better option.

Property Planning Australia director Mark Armstrong agrees that property beats shares when it comes to wealth creation “…because you can leverage it a lot more aggressively and your ability to build significant wealth through property is much more powerful”.

See API’s July issue for a balanced and in-depth comparison between property and shares, or else leave your thoughts on which makes the best investment below.

Matthew Liddy is the Deputy Editor of Australian Property Investor magazine.

Readers – what’s your preference… property, shares or both? Why?

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19 Comments

  1. I’m keen to hear the arguments from avid share investors about this article. Some of the arguments seem a little black and white. Personally, I started investing in shares and then switched to property for one simple reason – better return on investment.

    Every investment comes down to only 2 things: risk and return. We generally choose an investment vehicle that suits our risk profile and then attempt to maximise returns in that vehicle. But when I started investing I was after maximum return and attempting to minimise risk.

    To me there is simply no contest between shares and property. Property wins in 9 out 10 people’s circumstances without question. This is because it is easier to get higher returns in property than in shares and is generally of lower risk too.

    Summarising…

    1. Control. You can make intelligent decisions to improve your baseline profit beyond simply owning passively. E.g. you can self manage, rent per room, rent fully furnished/unfurnished, renovate, subdivide, extend, demolish and redevelop, wrap, vendor finance, joint venture, etc.

    2. Leverage. Higher LVR almost always means higher return on investment.

    3. Depreciation. Can’t claim this for shares.

    4. Better Performance. There was a lot in the article about median values versus All Ordinaries index. But it comes down to this: to outperform the stock market’s all ords you need to outperform the fund managers who dominate it – the experts. However, with property, you only need to outperform the average home owner to outperform the market as a whole.

    5. Limited Supply. Nobody is making any more land – it’s a limited resource. However, shares are merely a concept, a number in a computer. Theoretically, the number could be infinite. Also new shares are issued practically every year from most large companies, diluting the value of existing shares. And new companies enter the market every year. Those that disappear don’t increase the demand for those that remain, on the contrary, the more companies that go belly-up, the less investor confidence there is in the share market.

    6. Simple. People understand property. The share market is a little trickier. It’s easy to realise that a property built right next to a railway line is going to be noisy. (Perhaps you can lease it to deaf people). But does a net tangible asset per share, to share price ratio of less than 1.95 mean the share is a good buy or a poor one? Why did the asian crisis hurt Coles shares but not Woolies? Why did 911 kill News Corp shares when everyone was watching the news 24/7? Some people know, but the average investor doesn’t. But learning everything about a property is not so hard and it all makes sense.

    7. Capital Gains Tax. Unless you’ve been lucky to buy a share that stands the test of time or you only buy blue chip stock, sooner or later you’re gonna have to sell some shares. That means paying CGT. But holding property long term doesn’t have that downside. On the contrary, the longer you hold, the more profitable it becomes. Without ever selling you never incur CGT.

    I suspect share investors are gonna say that comparing the All Ords to median value proces rises is irrelevant because they don’t buy the All Ords. They buy individual shares when those shares are having a good run and then sell them when they get flat. They regularly jump ship to make their profits larger than the All Ords. This is not easy with property due to the high entry and exit costs and the time it takes to buy and sell.

    They might also argue that by trading options or CFDs, they effectively have the same leverage that property enjoys.

    It all comes down to the numbers. What’s a typical return on investment that an average share investor can achieve year in year out, through good times and bad over at least a ten year period.

    A ballpark figure for property…

    At 80% LVR and 7% interest with a yield of 5% and capital growth of 8% and tax rate of 30% and depreciation of 1%. This would give a rough return of 24% after tax. This is a good baseline figure. But you can add value through renovations, sub-divisions, developments, etc. Although it would be easy to initially do better than the yield, capital growth, LVR and depreciation, figures I’ve suggested, long term they would average out.

    So what can the average share investor achieve as a return on investment after tax per annum long term?

    Comment by Jeremy Sheppard — June 27, 2010 @ 11:41 am

  2. I am sick and tired of people being told that superannuation is the way to go.When i started work in 1981 i was fed the line i would retire with a million dollars in super.
    I have to work until i am 58 whether i like it or not or 60 to get the 15% tax saving.
    All the time being taxed on contributions and bottom feeding agent commissions.
    So i decided i had nothing to lose by investing in property.
    By purchasing property worth about one million and being negative geared for a few years i now find my self with my magic million well before 58 .
    I am the first to admit i have had rental problems along the way and have had to spend a few weekends cleaning up.
    But being in the position to retire when i want to not when i am told to makes it all worth
    while.
    Believe me when i say i am no brain surgeon and anyone can do what my wife and i have done.
    Don’t be seduced by the dark side investing in superannuation which is spruiked by people lining their own pockets.
    I am aware i will have tax issues down the track but at least they are my issues without anyone having their hand in my back pocket.

    Comment by glenn — June 27, 2010 @ 12:12 pm

  3. Personally, as a fairly passive investor (and mentor), I think BOTH are the way to go. I’m happy to have my super sit in shares which I adjust every now and then, slowly gathering momentum, while I invest mainly in property for wealth creation, where I’m a little more agressive (and a little more knowledgeable). I occasionally dabble in shares but I don’t have the interest to really get to know the market well enough in order to capitalise on it.

    Though I’m geared more towards property, I’ve balanced the risk between the two (less risk in property, larger portion of my assets, more risk in shares, smaller portion of my assets). As well as a small amount of cash and a larger Line of Credit, I think I’ll be pretty safe even IF the American claim of 40% came about…

    Long-term the returns on both classes are fairly similar, diversify and invest in both.

    Comment by Danny Johnson — June 29, 2010 @ 9:30 am

  4. Hi, Jeremy,
    Shares and properties are both vehicles for wealth preservation and creation. Your post seem to have overwhelmingly leaning on the later. Given this is a property forum, it is properly not surprising. In the past 60 years or so shares generally perform better than property, the last 10-15 years properties grew at a phenomenon rate, which should be treated with care. It was his time under the sun, but it may return to the long term trend, just look at US, UK etc.

    I question some of the points you had put forward.
    1- control.
    Shares offers a range of wider, relevent, informative control of one’s investment. Starts from share selection, parcel size, price entry point, price exit point, partial exit, continued buying, fast liquidity. As small share holder, you don’t control the board decisions, but every vote counts to some degree. To exercise the level of control over property such as renovation, redevelop, it will require moderate to large capital and lots of man hours.

    2. leverage.
    Shares offers fast, moderate-high leverage through margin lending. One could achieve far higher leverage through options. However, it is a double edge sword, works well in only in a bullish market.

    3.Perception of investing in property is simple.
    Any decision involve a large amount of hard earned money isn’t a simple one, and should not be treated as such. I agree with you that learning about property investing is properly easier than shares.

    Most people would use both property and share as part of their wealth strategy. Companies do that.
    McDonald’s key strength is that it owns its restaurant locations around world. It makes as much money from its real estate investment.

    Comment by Hao — July 1, 2010 @ 10:34 am

  5. My vote is for property.

    Yes, I know diversification is important… I’m a property investor and have tried to diversify into shares (including managed funds) several times in the past. Nearly every time has ended badly.

    Look at the massive share market crashes during the GFC, and the volatility and instability in the share market since then. Many Australians’ share-based investments (including super) have suffered huge reductions in value which may take years to recover to their pre-GFC levels.

    Contrast this with the situation of a property investor, whose portfolio over the same period would probably be worth more now than it was pre-GFC, after strong capital growth over the past few years.

    I have friends who mainly invest in shares and friends who mainly invest in property. The GFC nearly wiped out the ones with heavy share investments… one guy I know who liked to use a bit of leverage (margin loans) is now bankrupt. My property-investing friends, in stark contrast, are doing just fine.

    In my opinion:

    – it’s easier for the average ‘mum and dad’ investor to select good residential properties than it is to select good shares. In the share market you’re competing with large institutional investors and expert share analysts who have access to far more information than the average bloke on the street.

    – As the GFC proved, share prices are more volatile than property prices and have a much greater downside risk. When was the last time you heard of the value of someone’s house (in Australia) falling by 30%-40% in a short period of time?

    – I disagree with Hao’s point above (in Comment #4) that shares offer a significant degree of control over their performance. Once you own a share, you still have absolutely no control over what the company does or what happens to it, other than by the extremely limited effect of your individual shareholder vote. Look at the loss BP’s shareholders have suffered after the oil rig disaster in the Gulf of Mexico. In contrast, with an investment property you have complete control over what happens to it. You can insure against risks.

    I do believe it’s good to have some diversification into shares, and I don’t doubt that they can provide a good return in some cases. But I definitely sleep a lot better at night knowing the vast majority of my net worth is in property and not shares.

    Comment by Adrian (Melbourne) — July 1, 2010 @ 11:37 am

  6. Risk and Return. It all comes down to risk and return. So what kind of returns could the average share investor say are normal? In my original post I estimated the return to be about 24% for bog-standard buy and hold property investing. Can some share investors please do some calcs and let us know what returns are “normal” for a similar bog-standard strategy with shares?

    Comment by Jeremy — July 1, 2010 @ 7:44 pm

  7. Jeremy, you make it sound like, you can buy a property at anypoint in time, as long as its “good buy” you are guaranteed a massive return.

    “At 80% LVR and 7% interest with a yield of 5% and capital growth of 8% and tax rate of 30% and depreciation of 1%. This would give a rough return of 24% after tax. ”

    How often do you get rental properties yielding 5% after all the strata, council, water rates etc… and not to mention your property could be empty. Capital growth of 8% year on year? Where does this figure come from? I saw a property spruiker guy in a video and he only spruiked like 6% in the long term….

    Comment by Martin — July 14, 2010 @ 5:23 pm

  8. The 5% yield I quoted was gross not net. I think that’s pretty ordinary. Let’s take out another 2% for vacancy, insurance, repairs and maintenance, management, rates, etc. So net is only 3% now.

    And let’s take an estimate of only 6% capital growth long term rather than 8%. By the way, this means properties no longer double every 7 to 10 years as they have in the past several hundred years just about everywhere in the western world. In fact at 6% even after a full ten years they’ve only gained 80%. Surely this is a conservative enough estimate now.

    Assuming interest of 7% at 80% LVR, this equates to 5.6% of the value. That’s a 3.6% loss per year. Assume some other income earned by the investor in their 9 to 5 job and there may be a tax saving of about 1.6% roughly.

    So we have 6% growth and 2% negative cashflow. That’s only a measly 4% of real wealth the property has created for the investor. If we put in 24% originally (that’s 20% deposit and 4% stamp duty, legals, etc) then we’re only getting a 16.7% return (4/24) on our investment instead of the 24% I originally suggested.

    How’s that? Pretty ordinary capital growth, yield and LVR and no special strategy, just buy and hold.

    Now, can some share investors please let us know how easy it is to exceed that figure with a similar bog-standard share investing strategy that would make the extra risk seem worthwhile?

    Comment by Jeremy — July 14, 2010 @ 10:55 pm

  9. This is a gross over simplification of blue chip share investment for comparative purposes. No flaming please :)

    It assumes that you don’t sell the shares :) like with the property examples

    On average over the last ten years this would have been easy to achieve assuming that someone would loan you the money and didn’t make any margin calls.

    I think property is definitely a good investment on a long term basis, but just like shares if you buy at the peak you are still going to lose out in the short to medium term if you are forced to sell.

    deposit/equity $30,000.00
    lvr 80
    loan $150,000.00
    interest rate 7%
    interest payable $8,400.00
    average tax rate 30%
    Tax back on interest $2,520.00
    Dividends rate 5%
    Dividends return $9,000.00
    Dividend franking credits $2,700.00
    capital growth avg 10%
    capital growth 18000

    invested $38,400.00
    return $23,820.00 62%

    Comment by TonyGze — July 21, 2010 @ 11:07 am

  10. Unsurprisingly for a property forum, there are people who feel strongly about their chosen path, but both strategies have their place. You can read many books espousing both, but the spruikers who can prove that property is a better strategy invariably use a terrace in Paddington as their example vs. the All Ords. The share market hustlers always use CBA and BHP vs. the long-term AUstralian property market. It’s easy to pick winners in hindsight.

    In response to Jeremys post:

    1. Control. You have more investment options in the share market than the property market by a LONG shot – you just need to do some research. If you are willing to look at wraps then you may as well investigate CFDs and CDOs.

    2. Leverage. It’s called margin loans.

    3. Depreciation. Yep, fair call (but trivial affect on overall performance).

    4. Better Performance. Why are you obsessed with outperformance? That’s irrelevant. Return is all that matters whether you outperform or not.

    5. Limited Supply. “Nobody is making any more land – it’s a limited resource”. There are a few billion square kilometres undeveloped in this country yet… :) Yes the value of a share is a concept – it’s called market value. Just like the value of a property. Determined by greed and fear, just like shares.

    6. Simple. You understand property. And with a little more work, you could research the share market in the same way you do the property market. This point is pure bias. Nothing more, nothing less.

    7. Capital Gains Tax. Another furfy. You are comparing selling shares to not selling property! wtf? They are both treated in an identical manner by the ATO, except for a single PPOR.

    24% after tax? Compound over 10 years? You should be a billionaire by now.

    Comment by Simon — July 29, 2010 @ 6:01 am

  11. I dont have the expertise to say Jeremy is wrong as I am only a newby, but I read with interest Simon’s post. It seems to make more sense to me… because I refuse to believe, “it is that easy”.

    Comment by Martin — July 29, 2010 @ 9:40 am

  12. Thanx TonyGze. At last some actual figures for shares to compare.

    62% would turn me back to shares from which I originally came. But I think the estimates aren’t conservative enough. The LVR of 80% is high isn’t it? Last time I had a margin loan, the lender would only go as high as 75% on the bluest of the blue chip. And if they dipped in value for a day, you’d get a margin call. So I kept the LVR as low as 60%. But even then there would be times over a ten year period where one could expect a margin call with that LVR. Is 50% too conservative?

    Also, my margin lender charged a rate of interest about 2% higher than the interest charged on a home loan. Perhaps now days its cheaper than home loans. I dunno. But I’m guessing 9% would be more accurate.

    And 10% growth year in year out smashes the growth I gave for property of only 6%.

    I’m sure dividend yields can reach 5%. But is that a conservative figure too?

    Using a 50% LVR with 9% interest rate and 8% capital growth and 4% dividend yield, the return is 20%. So the estimates are important. That’s still a pretty good return though. Certainly better than money in the bank and it beats property’s bog standard return of 16% according to my calcs.

    I think doing the numbers is crucial for the comparison. So thanks for outlining the calcs TonyGze.

    And on the topic of calcs: Simon’s comment, “24% after tax? Compound over 10 years? You should be a billionaire by now”. Clearly maths is not his forte. Even starting as a millionaire that’s simply not possible. And I think that’s why there is still debate over this topic. People simply don’t do the numbers – or can’t.

    Every investment (property, FX, shares, bonds, small business, etc) comes down to only 2 things: RISK and RETURN.

    The question is, how much must a share portfolio outperform a property portfolio to make the higher risk worthwhile? And that probably comes down to each individual’s circumstances and appetite for risk – their risk profile.

    Comment by Jeremy — July 29, 2010 @ 9:11 pm

  13. To clarify some of my earlier points:

    1. By “control”, I meant that you have complete control over your property compared to voting at a shareholder’s AGM.

    2. Leverage over property is generally higher than for shares.

    3. Depreciation. Yes, it’s small. But it all adds up.

    4. Performance. I was trying to point out that the sharemarket is dominated by skilled investors whereas property is dominated by people finding a place to live. So to outperform the often quoted All Ords for example, may require a lot of skill whereas to outperform average property growth may not.

    5. Limited Resource. Yes there are billions of kms of undeveloped land. But not where everybody wants to live. And I disagree that the property market is driven by fear and greed like the sharemarket. On the contrary, the property market is driven by people needing a place to live.

    6. Property is simple. I was a share investor first. It wasn’t until I did the numbers on property that I realised the risk-to-return for shares wasn’t as favourable. I have no bias to property. To me it all comes down to risk and return. I’d invest in Ostrich Eggs if the risk-return profile was better than property. And I’ll go back to shares for the same reason. Just show me the numbers.

    7. CGT. Yes, same for property as for shares (except for PPOR). My point was that a share investor could outperform the All Ords with consistently good “trading” of shares rather than simply holding long term. But then the CGT may level any advantage gained. Whereas with property, the longer you hold, the more successful the result. And if you never sell you never trigger a CGT liability.

    Comment by Jeremy — July 29, 2010 @ 10:22 pm

  14. This is a good and interesting discussion, thanks for the info.

    However, I have to disagree with the following statement Jeremy.

    “On the contrary, the property market is driven by people needing a place to live.” (as opposed to greed and fear)

    I dont know the statistics, but I read somewhere that a high proportion of property owners are investors. In general, there are definitely more less capable investors in the property market. I just need to look at my workplace and friends. Most of them have bought a property and simply state, “I earn rent, rent pays off the property and eventually I will be rich”.

    I dont buy such simplistic optimism to easily get rich. Perhaps if they knew as much about property as you do, then I would think otherwise.

    If we were talking investing in shares or property this very moment, isnt investing in property this very moment pretty bleak? With prices more likely to stagnate or drop? Therefore a bad investment decision?

    Comment by Martin — July 30, 2010 @ 10:56 am

  15. Martin,

    I’ve always heard that property investors account for around 30% of the property market. Mustard Solutions collects demand to supply ratio data from around the country (www.mustardsolutions.com.au). Part of the DSR calculation is based on the proportion of renters to owner-occupiers for a suburb. So I checked the figures for June. The average proportion of renters was 23% for over 5,000 suburbs around Australia. May had the same figure, 23%.

    Now some of these renters will rent from housing commission. I saw something recently on the ABS website that housing commission account for about 10% of the rental market. Don’t quote me on that though. If it’s true, it means the number of investors is a little under 21%, not 23%. This is residential mind you, not commercial. And those figures will of course fluctuate radically based on which suburb we’re talking about. That means owner-occupiers own more than 75% of the market. Apparently, in New York and London it’s the other way around: 75% of the market is owned by investors!

    Anyway, my point is that I believe investors don’t influence the market as significantly as owner-occupiers (OOs). And OOs base their decisions on where they would like to live and what they can afford. But I’m sure there are a lot of trades placed on the ASX every day based on fear and greed rather than which share scrip the investor will sleep under tonight.

    That’s not to say, as you rightly point out, that fear and greed can’t also influence the property market.

    As for your question about whether it is a good time to buy property: I’ve heard it said that the best time to buy property is in the past, the second best time is in the present and the worst is in the future. Certainly this has held true for the last 200+ years in this country.

    According to Residex, Melbourne properties rose something like 22% over the 12 months to April 2010. In the middle of a global recession. While the Sydney and Melbourne markets were flat from 2004 to 2009, Darwin and Perth were flying high. And from 2004 to 2006 QLD was doing pretty well. We have such a wide number of markets in Australia. If you can diversify into interstate investing, I’m sure that any year, any time, there’ll be a market just ripe for the picking.

    Comment by Jeremy — July 30, 2010 @ 7:45 pm

  16. “As for your question about whether it is a good time to buy property: I’ve heard it said that the best time to buy property is in the past, the second best time is in the present and the worst is in the future.”
    I have heard that too, but that was always in a property seminar.
    At some point that time in the future becomes present and shortly after it becomes the past.

    Comment by Hao — August 16, 2010 @ 9:54 am

  17. Jeremy Sheppard – Interesting points you make there, however I have chosen to diversify my portfolio into shares also. Being a geny Y (property and shares) investor you can make some very good short term gains within the stock market simply by reviewing portfolios which are sometime left of mainstream. Meaning that if you look at the mainstream media even at present only up until recently late line and lateline business wouldn’t dare to mention small caps or even micro cap funds. You just have too review and the affect in which the carbon tax has had on renewable energy entrepreneurial companies…..their gains this week have not been mentioned leading up to the Gillard’s announcement but you just have too look at the return prior leading up to it and the after effect. The returns made within a short period ie days to 1 week are more than the growth you would make in a year based on even the average growth of 6% annually with property. All in all the old adage of not to place all ones eggs in one basket always works hand in hand with a clearly defined goal and adherence to that process in order to achieve it with constant evaluation through out the journey.

    Comment by Rosco — July 11, 2011 @ 5:55 pm

  18. Yeah, agreed Rosco. I have no doubt that with property you simply can’t make the same kind of returns as you can with shares in a matter of weeks. But similarly, you don’t make the same losses either.

    Year in and year out if you’re able to pick the winners and without leverage (small caps) get a better return on investment than with property, then happy days for you.

    I think very few people actually go to the trouble of comparing the return on investment of both investment vehicles accurately. Leverage is a big one share investors leave out. In fact I’m noticing that Aussie property investors buying in the USA are ignoring leverage in their ROI calcs too.

    If I borrow 20% of the purchase price of a property and the property grows by 10% over the year, I’ve actually made a 50% return on investment, not 10% – assuming the property is neutrally geared. So without leverage, you need staggering growth just to match the ROI for an investment with small growth and high leverage.

    Of course derivatives are effectively leverage, so if you can keep picking the winners consistently, you can get similar returns – unless there are few derivative markets to trade in for small caps/penny shares. I wish you the best of luck with it.

    Comment by Jeremy Sheppard — July 11, 2011 @ 8:36 pm

  19. Jeremey…I agree on the USA bargain HUNT….I have been following the market closely with regards to the renewable energy sector.Well mainstream media rarely dabble into this area of the market looking more for returns in stock from companies such as BHP and RIO etccc the bluechip shares… Well in the past to two weeks from the 28th of June share prices have return very strong gains in excess of 130% coming off a YTD low of 12c per share on GDY (asx codes). Another to look at closely is PTR (their stock is a 19c from a low of 8c)these two are the main players in geothermal, upon opening the ASX share price in theses two companies yesterday rose by 35-40% and 20-25% respectively…. The short term gains seen have been great, however the trigger point is the governments 10 billion energy fund, what must be noted is that the companies I invest in 95% of the capital has come from private equity meaning investors and what is portrayed with regards to the market sentiment by business in this key area is sometimes far removed from reality…..Yes penny stocks in this case have returned more than the 10 bagger (term I’m sure you are aware of) Just food for thought always good conversing with others on points of interest.

    Comment by Rosco — July 12, 2011 @ 11:06 am

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